Question

In: Accounting

The following trial balance relates to Rapcap plc at 31 December 2019: £000 £000 Land and...

The following trial balance relates to Rapcap plc at 31 December 2019:

£000

£000

Land and Building – at cost 1/1/ 2019

350,000

Accumulated depreciation of building at 1/1/ 2019

50,000

Plant at cost

108,600

Accumulated depreciation of plant at 1/1/ 2019

24,600

Investment property – at valuation 1/1/2019

30,000

Investment income

1,200

Purchases

158,450

Distribution costs

26,400

Administrative expenses

27,200

Loan interest paid

3,400

Inventory at 1/1/ 2019

26,550

Corporation tax under-provided for 2018

250

Trade receivables/ trade payables

30,950

35,300

Revenue

313,000

Equity shares of 20p each fully paid

150,000

Retained earnings at 1/1/2019

121,400

8% loan note (redeemable 2025)

42,500

Revaluation reserve at 1/1/2019(arising from land and buildings)

18,500

Deferred tax

9,000

Bank

3,700

765,500

765,500

The following notes are relevant:

  1. At 1 January 2019, Rapcap plc had its land and buildings revalued to £400 million. This valuation includes a value for land of £80 million. The estimated remaining life of the building at that date was 40 years. Depreciation of buildings is charged on a straight-line basis and is allocated 70% to cost of sales, 20% to distribution costs and 10% to administrative expenses.

  1. During the year, Rapcap plc manufactured an item of plant that it is using as part of its own operating capacity. The details of its cost, which is included in cost of sales in the trial balance, are:

£000

Direct materials cost

9,000

Direct labour cost

6,000

Installation costs

2,000

Pre-production testing

2,000

Directly attributable overheads

3,000

General and administrative overheads

2,500

The manufacture of the plant was completed on 30 September 2019 and the plant was brought into immediate use, but its cost has not yet been capitalised.

  1. All plant is depreciated at 20% per annum (time apportioned where relevant) using the reducing balance method and charged to cost of sales.

  1. On 1 January 2019, Rapcap plc acquired plant and machinery which had a cost of £30 million. The company traded in (part-exchanged) an old item of plant for a value of £10 million and paid cash of £20 million. The cash transaction has been accounted for in the trial balance above, but the trade-in has not yet been recorded. The plant traded in had been bought on 1 January 2017 at a cost of £12.5 million.

  1. The investment property is let at commercial rates to tenants who are not connected to the company in any way. Rapcap plc adopts the fair value model in its accounting treatment of the asset. At 31 December 2019, the property had a value of £35 million.

  1. The inventory at 31 December 2019 was valued at cost of £28.5 million. This includes £4.5 million of slow-moving goods. Rapcap plc is trying to sell these to another company, but has not been successful in obtaining a reasonable offer. The best price it has been offered is £2 million.

  1. The Corporation tax account in the trial balance represents the under-provision of the previous year’s estimate. The estimated Corporation tax liability for the year ended 31 December 2019 is £9.2 million. At 31 December 2019 there were £42.5 million of taxable temporary differences. The Corporation tax rate is 20%.

Required:

  1. Prepare for Rapcap plc, a Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2019 and
  2. A Statement of Financial Position as at 31 December 2019

(Note: A Statement of Changes in Equity is NOT required)

  1. A schedule of movements in property, plant and equipment for the year ended 31 December 2019
  2. The following ratios have been extracted from industry averages:

Current ratio

1.50

Quick ratio

0.90

Inventory days

80 days

Receivable days

40 days

Payable days

40 days

Calculate the relevant ratios for Rapcap plc and comment on the liquidity position of the company and its management of working capital.

Solutions

Expert Solution

Working Notes:- (All figure in million)

1. calculation of depreciation on building:- (400-80)/40=8

allocation of depreciation :- to cost of sales= 8*70%=5.6,

to distribution cost= 8*20%=1.6,

to administration exp.= 8*10%= 0.8

2. Calculation of value of palnt which is manufactured in company:-

Direct materials cost

9,000000

Direct labour cost

6,000000

Installation costs

2,000000

Pre-production testing

2,000000

Directly attributable overheads

3,000000

General and administrative overheads

2,500000

Total Cost (9000+6000+2000+2000+3000+2500)= 24500000 i.e 24.5 million

So Depreciation on Plant for 6 months = (24.5*20%)/2= 2.45

3. Calculation of Profit and Loss on trade of palnt:-

Cost of Plant as on 01 january 2017= 12.5

Dep for year ended 31 december 2017= 12.5*20%= 2.5

Dep for year ended 31 december 2018= (12.5-2.5)*20%= 2

So value of plant as on 01 january 2019 is (12.5-2.5-2)= 8

Trade value of old plant = 10

so profit on trade of plant = (10-8)= 2

4. Formula of Cost of Sales: Beginning Inventory + Raw Material Purchase + Cost of Direct Labor + Overhead Manufacturing Cost – Ending Inventory

5. Calculation of Closing Inventory= 28.5-4.5+2= 26

6. Depreciation on Plant : (108.6-8-24.6)*20%= 15.2

A. Statement of Profit and Loss for year ended 31st December 2019 - (All figure in Million)

Revenue : 313

Invesment income: 1.2

Profit on Trade of old Plant: 2

Total Revenue(A) : (313+1.2+2)= 316.2

Less : Cost of Sales: {26.55+158.45+26.4-26+} = 185.4   

+ Value of Plant which have to be Capitalised: 24.5

+ Depreciation on Building wrongly included (5.6+1.6) :7.2

Net Cost of Sales :(185.4+24.5)=    217.1

Less: Other Expenses and Depreciation   

Administrative Expenses : (27.2-0.8)= 26.4

Depreciation (8+2.45+15.2) = 25.65

Loan Interest Paid= 3.4

Other Expenses and Depreciation (26.4+25.65+3.4)=   55.45

Total Operating Expenses (B) ( 217.1+55.45) = 272.55

Profit before Tax (A-B) i.e. (316.2-272.55)= 43.65

Less: Corporation Tax @ 20% (8.73)

So Profit After Tax: 34.92

B. Statement of financial position

Equity Capital : 150

Revenue Reserve (18.5+5) : 23.5

Retained Earnings (121.4+34.92) : 156.32

8% Loan : 42.5

Trade Payables: 35.3

Deferred Tax :(9-8.73-0.25) : 0.02

Total Liabilties (A) : (150+23.5+156.32+42.5+35.3+0.02)= 407.64

Land and Building (400-8) : 392

Plant And Machinery (60.8+22.05) : 82.85

Invesment Property : 35

Bank : 3.7

Trade Receivable : 30.95

Closing Inventory : 26

Total Assets (B) : (392+82.85+35+3.7+30.95+26) : 570.5

Net Financial Position (B-A) i.e. (570.5-407.64) : 162.86

C. Calculation Of ratio

Current Ratio : 26+30.95+3.7/35.3 = 1.72

Ouick Ratio = 30.95+3.7/35.3 = 0.98

Receivable Days = (Trade Receivable/net credit sales) *365= (30.95/313)*365 = 36 Days

Payable Days=   (Trade Payable/net credit Purchase) *365= (35.3/158.45)*365 = 81 Days


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